Zappos.com:
Developing a Supply Chain to Deliver Wow!
Stanford Graduate School of Business
David Hoyt, 2-13-09
Presented by:
Jon McDonald
Business 550
November 23, 2010
World’s Largest Online Shoe Retailer
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Founded in 1999 by Nick Swinmurn
$1 billion annual gross sales (2008)
3% of U.S. population are Zappos’ customers
Known for its high quality experience: deliver
“wow” to customers, suppliers, and affiliates
• Repeat customers grew from 40% in 2004 to
75% in 2008
Zappos.com
• Strong supply chain management is an
important part of the company’s success
• 1,500 employees, half in its Nevada
headquarters and call center, and half in
its Kentucky fulfillment center
• The company culture is an influence on
the supply chain
“Wow Experience”
• Website speed
• Telephone support: calls answered within 20
seconds
• Free returns within 365 days
• Free shipping
• Large pictures of shoes on website so
customers know exactly what they are getting
Call Center
• Staffed 24/7 by 400 people in Las Vegas
headquarters
• All new hires spend two weeks in call center
• 5,000 calls received a day, 5,000 chances to
“wow” a customer
Free, Rapid Delivery
• Free shipping, often arrives next day
• Overnight deliveries made by UPS
• Work closely with UPS to increase efficiency
Many Stages of Growth
• Vendors
• Other products added: clothing, electronics,
jewelry, houseware, luggage, sporting goods
• Operational model:
– Delivery system
– Inventory system
– Web system
• International expansion
Evolution of the Operational Model
• The drop-ship model:
– Orders placed on Zappos website
– Orders forwarded to vendor
– Orders filled by vendors
• Major problems with drop-ship model:
– Information on website only 95% accurate
– Zappos did not know when orders shipped
– Zappos did not know of unhappy customers until
it was too late
Evolution of the Operational Model
• Brought inventory in-house:
– November 2000 Zappos began to stock inventory
– Bought 30,000 sq foot store in Willows, CA
– 100 miles north of Sacramento
– Not ideal:
• No major airport
• Shipments made by UPS Ground
• Warehouse was a manual operation
– Continued to use the drop-ship approach
Evolution of the Operational Model
• Third-Party fulfillment
– Outgrew Willows distribution center
– UPS approached Zappos to manage its inventory
and fulfillment
– Zappos continued to own the inventory, but it
would be stored at a UPS facility near its hub in
Louisville, Kentucky
– Order fulfillment would be handled by a third
party
Evolution of the Operational Model
• Advantages of third-party fulfillment:
– Two-thirds of customers would receive deliveries
within two days using UPS ground and at a lower
cost than shipping from Willows
– More efficient use of automated tools
– Zappos would not have to make major capital
investment
Evolution of the Operational Model
• Disadvantages of third-party fulfillment:
– Zappos business involved more stock-keeping
units (SKUs) than the system could handle, since
each shoe style/size/color combination was a
separate SKU
-Zappos had 70,000 to 80,000 SKUs, and within 6 to
8 weeks the company knew they had to develop
their own distribution center
Evolution of the Operational Model
• Kentucky Distribution Center
– Opened their own distribution center 30 miles
from the UPS hub in Louisville
– Developed its own systems and procedures
focused on a highly SKU-intensive business that
required almost perfect inventory accuracy
– Random stocking approach
Evolution of the Operational Model
• Initial 265,000 square foot facility filled to
capacity in 2006, Zappos opened a new
832,000 square foot facility
• Automated conveyors, carousels
• Robotic system installed in 2008, doubled
worker efficiency
Evolution of the Operational Model
• End of drop-shipments
– Zappos was still sending orders to its vendors for
drop-shipping until 2003, though 75% of orders were
being shipped from the Zappos warehouse
– Customers served by the Zappos warehouse were
happier with the experience than those whose orders
were drop-shipped
– Zappos stopped using drop-shipments in order to
fulfill its customer service mission
– When an item reaches zero inventory in the
warehouse it no longer appears on the website
Supply Chain Management
• Buying
– Difficulties of excess inventory or loss of potential
sales when items become a huge hit
– Merchandising department has 100 employees,
half of whom are buyers and assistant buyers
– Buyers are the primary points of contact for
vendors
– Extranet allowed vendors to see the same
information as the buyers
Operating a Supply Web
• Technology to design and run a retail website
• Call center to deal with customer questions and
problems
• Distribution system optimized for delivery to
retail customers
• Zappos excelled at all these areas and began to
work with manufacturers to sell directly to
customers under a program called: “Powered by
Zappos”
• The supply web allowed the same inventory to be
accessed through many websites
Scheduling Product Delivery
• Zappos placed orders with 1,400 different
brands in 2008
• Suppliers given delivery windows in which
product may arrive at distribution center
• Inefficiencies in the warehouse operation, as
some days had significant order arrivals, while
other days were quiet
Dealing with Excess Inventory
• Not constrained by space needs that brick and
mortar stores face
• Some price reductions based on decrease in
sales
• Opened several outlet stores to deal with the
excess inventory
• Bought the online shoe company 6pm, which
Zappos uses to sell some slow moving
inventory
Opportunities for Improvement
• Ship shoes directly from China to Zappos
distribution center
• Cut down on partial truckloads by introducing
own fleet of Zappos trucks
• Expansion outside of North America
Conclusion
• Zappos remains true to its philosophy of
customer service
• Zappos has been successful even in tough
economic climate
• Zappos was sold to Amazon.com in July 2009
for 850 million dollars
Questions
1) What company bought Zappos in 2009?
A.
B.
C.
D.
Wal-Mart
Ebay
Amazon.com
Buy.com
2) What is not part of Zappos “wow” experience?
A.
B.
C.
D.
Website speed
Telephone customer service
Guaranteed lowest price
Free shipping and returns
3) What did Zappos do to deal with excess inventories?
A.
B.
C.
D.
E.
Opened several outlet stores
Bought 6PM.com to use to sell discounted inventory
Used some small price reductions
Initiated a relationship with Overstock.com to sell excess inventory
All of the above